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Luke is a 45-year-old divorced father of two school-aged children.
He has no debts except for his mortgage. But for someone who makes $102,000, this mortgage is substantial — $495,000 on a home valued at $1.1 million. His situation is best described as house rich and cash poor.
Keith Beatty/TORONTO STAR

By Deanne GageSpecial to the Star

Mon., Dec. 30, 2013

Luke is a 45-year-old divorced father of two school-aged children.

He has no debts except for his mortgage. But for someone who makes $102,000, this mortgage is substantial — $495,000 on a home valued at $1.1 million. His situation is best described as house rich and cash poor.

“Yes, it is a big mortgage but is a result of my payout to my ex-wife for ownership of my house,” he explains.

Why not sell the house? Luke wants to keep the property for sentimental reasons. “I built this house myself,” explains Luke, a designer. “It is the only house my kids have known and I don’t want to sell it until they are (finished school).”

He wants to know how he should focus his efforts: paying down his mortgage or saving for retirement, which he hopes will be in 20 years’ time. He currently has $90,000 in his RRSPs and no pension plan, but would like to have $60,000 a year (in today’s dollars) in retirement income.

Luke is in better financial shape than he might feel at the moment, says Guilfoyle. But to be in an even better situation, he needs to pay down debt and save for retirement simultaneously. “Luke’s problem is that he doesn’t have a specific plan,” Guilfoyle says. “He needs to focus on both immediately.”

Luke’s house debts are actually divided into two loans: he has a $355,000 mortgage at 2.99 per cent interest and a $140,000 home equity line of credit (that he used to buy out his ex-wife) at 4 per cent interest. Step one is combining his line of credit with his mortgage. Doing so will minimize interest costs, but more importantly, he’ll establish an end date for paying off all the debt. In this case, Guilfoyle recommends a 20-year amortization, which will ensure the mortgage is gone by age 65, his ideal retirement age.

There’s a $1,600 surplus between Luke’s monthly expenses ($4,349) and his monthly income ($5,950). Luke had been using the extra funds to tackle his line of credit but now that it’s combined with his mortgage, Guilfoyle recommends using the excess money in a different way. He should contribute $1,000 toward his RRSPs, and $600 toward a tax-free savings account, which could be used as both an emergency account, and funding extras such as an annual vacation for his kids.

As a high-income earner, Guilfoyle says Luke needs to diligently contribute to his RRSPs to reduce his net income and ultimately save on the amount of payable income taxes. The $1,000 should specifically be set up as a monthly contribution plan. “This will help create a forced retirement savings plan, and will reduce the risk of Luke spending the money on lifestyle expenses,” Guilfoyle says.

RRSP contributions would result in a higher tax refund for Luke, which in turn can be used to make lump sum payments against his mortgage.

If Luke contributes $1,000 a month to his RRSP for the next 20 years, it will grow to just under $650,000, assuming a 5 per cent rate of return.

Luke’s home also has a role to play in his retirement planning strategy. Assuming the property continues to increase in value by 3 per cent per year, Guilfoyle estimates it will be worth just under $2 million when Luke retires at 65.

Luke could then downsize at retirement and move into a $1 million (or less) home or condo. That would leave Luke with approximately $1.65 million in retirement savings ($1 million in proceeds from his sold home and over $650,000 from his RRSP portfolio). This amount doesn’t include the money Luke would receive in government entitlements from Canada Pension Plan and Old Age Security.

Since Luke enjoys his design work, he will likely continue part-time work past age 65 providing consulting services. Guilfoyle believes this will also provide a nice supplement to his retirement income.

Guilfoyle notes that Luke doesn’t have a will or powers of attorney in place and suggests he set those up right away. Having young kids also means ensuring adequate insurance is in place in the event of Luke’s premature death. Thankfully, Luke and his ex-wife continue to pay for their joint-first-to-die life insurance policy, which is enough to eliminate Luke’s debts.

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